September 3, 2025
What happened?
On August 25, 2025, the Fifth U.S. Circuit Court of Appeals remanded two rules adopted during the Biden administration, giving hedge fund associations a partial victory. The rules were not vacated. However, the Securities and Exchange Commission (“SEC”) must now review them in light of the court’s opinion.
The court’s limited holding applies to the Short Position and Short Activity Reporting by Institutional Investment Managers (the “Short Sale Rule” that created Form SHO filing reporting requirements) and the Reporting of Securities Loans (that required reporting of specific terms of securities loan transactions to registered national securities associations). These two rules were adopted within an hour of each other in 2023. The mistake the SEC made, according to the court’s opinion, is that the SEC did not consider the collective economic impact of these rules that required reporting on information with a significant amount of overlap. Instead of considering the impact of one rule on the other, the SEC tried to use the timing of the adoption to say that one was still a proposed rule, which does not require an economic analysis.
Because these rules were adopted at the same meeting of the SEC, the court did not accept the “proposed rule” argument. On remand, the SEC has the opportunity to substantiate its decision by quantifying the cumulative economic impact of both rules consistent with the court’s opinion.
What does this mean for me?
Any Biden era rule faces an uphill battle in the current administration, and the Short Sale Rule certainly has a long way to climb. The White House initiated a regulatory freeze at the start of the new administration, and the Short Sale Rule deadline was extended before Form SHO reporting went into effect. Adoption of the rule was a 3-2 vote in the last administration along party lines. Commissioners Peirce and Uyeda dissented then and are part of a majority now. The Short Sale Rule was also among the rules that republican members of the House Financial Services Committee asked to be withdrawn in an interagency letter earlier this year. Given the current priorities of the Trump administration and Chairman Atkins, we could see a pivot away from reporting requirements for short selling activity.
At the same time, this opinion is surprisingly narrow in a post-Chevron world. After the Loper Bright decision did away with Chevron Deference in 2024, courts no longer had to defer to the interpretation of agencies like the SEC. Here, the hedge fund associations argued against the rules on multiple grounds including that the rules were “arbitrary and capricious,” “irreconcilably contradictory,” and that the SEC had exceeded its statutory authority. The court did not agree with any of these arguments, nor did it insert a different interpretation after citing Loper Bright. This means that there is a possibility that a Short Sale Rule could be brought in the future and survive legal challenges.
